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Some More Thoughts from Michael Golub

Out of bad times come good times; that is why I foresee positive changes arising from the very uncomfortable period we’re currently living through.

As Warren Buffett is fond of saying, “Only when the tide goes out do you see who is not wearing a swimsuit.” His words ring true when I consider that:

- Many unethical businesses, such as the biggest Wall Street investment banking firms, have been exposed for what they are and have been eliminated from the marketplace. It will be a better world without them.

- Many top leaders of our country have also been exposed, having fallen victim to their conflicts of interest by accepting illegal or inappropriate gifts and contributions, and even cheating on their income taxes. It will be a better world without them as well.

- Many financial frauds such as Bernard Madoff are now being flushed out, and many of our country’s regulatory organizations designed to protect us from such frauds have now been exposed as grossly negligent and incompetent. There is now a renewed appreciation for the necessity of adequate legal oversight of both businesses and individuals. This is good.

- Many of the ill-advised and destructive ideas in the minds of both our political and business leaders are now gone. As a result, we are on the verge of many years of better, more effective, more sensible political and business leadership. This is also good.

The above not only applies to the United States but worldwide. There is new respect for investment risk around the globe, and businessmen now have a healthy reluctance to take foolish risks with capital. This is true on both an individual and an institutional level. With a renewed appreciation for the dangers of excessive leverage, there is renewed motivation by individuals and businesses alike to exercise good judgment when making financial decisions.

Economic stimulus is also occurring worldwide, through the coordinated efforts of the world’s major governments. The stimulus will work because of this synchronized leadership in action and the power of global wealth to restore and repair the economy. We have already begun to see this restoration progress. Credit markets appear to have passed the crisis point that occurred in October when credit markets froze and panicked “runs” were occurring on banks and money market funds. Major U.S. corporations such as American Express, General Electric, and Procter & Gamble are again able to access the capital markets to fund their operations and, notably, are trading at valuation levels not seen in decades. Banks, once again, trust each other enough to lend to one other as evidenced by improving LIBOR credit spreads.

What excites us most is the 9 trillion dollars in cash parked on the sidelines in Treasurys and other short-term instruments, a level that has never existed before in history. This amount of cash equates to almost the entire market value of the S&P 500. This cash is currently earning unacceptably low interest rates and will soon have to go somewhere else in search of a higher return. I believe this cash will initially find its way into large capitalization, blue chip businesses that pay healthy dividends. This is enough fuel to create and sustain a huge bull market for stocks. I believe this will happen sooner than people think.

Perhaps the most positive occurrence from the current sorry state of affairs is that we are witnessing a reordering of priorities in our society. Robert J. Birnbaum, former president of the New York Stock Exchange, was recently quoted as saying, “Wall Street has taken a hit, but so what? We don’t need all the bright people going to New York to chase money. There’s a lot of things bright people can do, like finding a cure for cancer.” To say this another way, perhaps all those expensive educations and burning talents that wound up on Wall Street will be redirected to fields of endeavor with some tangible output.

So much good will come for our society from this reallocation of priorities. In the great depression years, 1929 through 1939, creative talent in the U.S. flourished as in no other period of the last century. The 1930’s was a golden age of art, photography, theater and film. In New York City alone, the Empire State Building, the Chrysler Building, and Rockefeller Center were built. The Museum of Modern Art, The Whitney Museum, The Frick Museum, and the Guggenheim Museum all opened their doors for the first time.

After the collapse of Wall Street in 1929, our culture stopped being “all about money”. Our country still survived and flourished. From our current troubles, we most certainly will survive, and we will rise and flourish once again even more than in the past. Though it may not be apparent today, America will become a better place for us, our children, and grandchildren.

With My Best Regards,

Mike Golub
CEO & Founder

Disclaimer: All opinions presented in this commentary are strictly those of the Golub Group.  You should not construe any implied or expressed conclusions presented as a promise of future returns.

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